The foreclosure fraud settlement has been predicted as coming in “a matter of weeks” for I think about 5 months now. I don’t see it coming at all, so it’s not entirely smart to jump on every rumor of a deal or a settlement. But Shahien Nasiripour’s story about a side deal with Bank of America has a lot of implications:
Federal and state prosecutors are in advanced negotiations with Bank of America in pursuit of a settlement that would forgive the bank for a broad range of past mortgage abuses in exchange for fines that would finance a significantly expanded relief program for struggling homeowners, according to three people with direct knowledge of the matter [...]
The options under discussion with Bank of America, the largest U.S. bank by assets, go beyond what’s on the table in the larger group talks. Justice, along with a small band of state legal officers, is pursuing an agreement that would have the bank forgive what participants described as a significant amount of mortgage principal owed by distressed borrowers in exchange for receiving an effective grant of immunity from government prosecution related to alleged mortgage and foreclosure wrongdoing [...]
Participants described the talks as fluid. Remaining issues include the scope of the release and the breadth of borrower relief, sources said.
For example, it could involve a release from liability for alleged lending abuses; alleged failure to properly securitize home loans in accordance with state laws; alleged abuses of distressed borrowers who fell behind on their payments; alleged illegal behavior when foreclosing on those homeowners; immunity from suits involving a combination of those claims, or from all of them — an effective grant of immunity from prosecution.
We’ll get into the offensiveness of the play for broad liability release in a second. But let’s consider all of these above-mentioned crimes. This feels like a vindication of sorts for me. Those of us watching these banks and their servicers abuse the public and commit fraud for the past several years were not crazy. We were not seeing things. Despite the dismissal of our evidence by bankers and their media/PR complex, you have BofA trying to get out of its mounting legal problems over these very same issues: securitization failures, servicer abuse, illegal fraud upon state courts, chain of title breakdowns, all of it. This is as close to an admission as you will get.
Now, it comes in the context of a negotiation over releasing BofA from responsibility for these crimes, so the vindication is rather fleeting. We don’t know how much more money BofA will offer for the release, and how they will forgive mortgage principal. We certainly don’t know if it will be enough to cover the cost of the abuse, because we have not had the kind of investigation that would provide that information. But we do know that those people inside BofA who broke the law repeatedly would not be going to jail. And thus, the behavior will likely continue. Hysterically, it’s BofA talking about moral hazard later in the article, with respect to who would benefit from the mortgage relief:
If an accord were reached, which participants stress is a ways away, borrowers that met the following criteria would be eligible for some kind of assistance:
• Their mortgages would have to either be owned by Bank of America or be serviced by the bank on behalf of private investors. Fannie or Freddie loans would not be eligible;
• A current principal balance of 1 million or less;
• The homes would have to be occupied by the owner, so no investor-owned properties;
• And the borrowers’ monthly mortgage obligation would have to comprise at least 25 percent of their monthly income.
Participants believe such a pool would lessen the risk posed by moral hazard, a scenario in which people escape consequences for destructive activity, thus encouraging more destructive activity in the future, sources said.
Really, it’s the HOMEOWNERS’ moral hazard we have to worry about? What about the banks? BofA will have been able to pay off the government for breaking the law repeatedly and systematically. Why would we expect them not to do this again? After all, state and federal regulators do not have a full accounting through an investigation, and the enforcement capabilities, while better with the new Consumer Financial Protection Bureau in charge, are not likely to be overwhelming. We’ve already seen that the banks, after swearing to Congress and entering into agreements with OCC that they were done robo-signing, just continued to do it.
Bank of America needs this resolution, because their liability is starting to put them in finanical trouble. But they’re only negotiating with a few states, perhaps in the hopes that others will join them later, or that the markets will reward them for putting these problems behind them. But Yves Smith points out that this wouldn’t end their liability even if granted:
This part of the settlement discussion is sneaky and troubling: “alleged failure to properly securitize home loans in accordance with state laws.” The big violation with “proper securitization” is chain of title, and more and more homeowners are waking up to the mess banks have made here and are not happy with it. Yet even as offensive as this waiver is, the AGs can only waive their rights to prosecute. They can’t waive private parties’ rights to action, which means borrowers can and will continue to use chain of title issues to fight foreclosures, and investors, if they finally take enough losses to rouse themselves, would also be able to sue on this basis. The importance of having state AGs act is that they conduct investigations that private parties can leverage, and also legitimate certain types of litigation (investors in particular tend to be conservative, and would rather ride in the slipstream of other efforts).
In other words, BofA would still be at risk. And while taking the potential for an AG investigation out of the mix would be a big deal for them, right now those same private actions and investors are eating into their profitability. That may only get worse.